Research: What happens to a Startup when Venture Capitalists replace the Founder
Company founders often enlist the services of Venture Capital (VC) funds in order to raise equity essential for growth. This is particularly true for high-growth industries or highly competitive markets. An unfortunate consequence of this fund borrowing is that entrepreneurs lose control of the board, their financial equity gets reduced and worse, sometimes they could get replaced. VCs are often extra proactive in replacing the founder with their own man, often to simply stamp their authority in the guise of professionalizing the startup. This is truer for those startups that are struggling. In order to study the correlation between the founder and his/her replacement, business intelligence was collected from Venture-source, which tracks round-wise funding from VCs. Up to afifth of founders tend to get replaced, but this is not always bad news. The replacement is often more experienced at such scaling up, so on average the returns per equity and total shareholder value for the founder tends to increase, in spite of lower levels of actual control. Most of these replacements came from within the same states where the company was based in. While most states in the US have a non-compete policy for the exiting founder, it has been turned around in fourteen states.
Uploaded Date:03 March 2018
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